A Framework for Positive Board - CEO Collaboration
In the recent 2024 IESE Survey of Board Directors, board members expressed the view that collaboration between boards of directors and CEOs is a solid driver for improving board effectiveness. More than 80% of those surveyed indicated that such collaboration is critical for a high-performing board.
This outcome is consistent with recent research. However, it contrasts with the view of the board of directors which emphasizes the control perspective of the CEO and top managers, a function that has been attributed to boards over the past few decades.
A major obstacle to board effectiveness is information imbalance between senior managers and board members regarding the firm’s key challenges. In most cases, senior managers know much more about the firm than board directors. This imbalance is the underlying cause of misunderstandings regarding fundamental facts, as well as the functions and responsibilities of governance.
The growing focus on the role of culture in corporate governance and its effects on interpersonal dimensions within boards of directors suggests that boards that function as a collaborative team tend to be more effective than boards with lower levels of collaboration.
The concept of boards as teams also includes the need for a balanced and diversified portfolio of professional competencies among board members. A stronger board not only requires individual members with expertise and diverse competencies, but also the effective interaction and integration of those competencies. The way board directors collaborate to leverage their strengths and collectively develop the board’s capabilities to address challenges is also critical.
Several key factors can foster deeper collaboration between the board and the CEO.
The first factor is the chairman’s role on developing effective board leadership. By setting the tone and guiding the quality of board discussions, as well as shaping the interaction style between the board and the CEO, the chairperson defines the board’s approach to addressing critical issues and facilitating communication among directors, the CEO and senior managers. This dimension involves not only rules of fairness and personal behavior, but also the depth of discussions, and the transparency and accountability of the CEO when interacting and discussing issues with the board. Effective board leadership is the first step toward positive board-CEO dynamics.
The second factor is the need for clear objectives for the CEO and the senior management team. Most companies tend to have well-defined corporate goals for the next year, as well as for the next three to five years. Leadership development research suggests that senior management development should be guided by specific goals. Some of these may be financial and quantitative, while others may be more qualitative, such as nurturing and preparing the next generation of senior leaders, attracting external talent with certain competencies or improving the work environment and culture. Positive interaction between the board and the CEO requires the board to be clear and specific about company’s goals and the outcomes it expects to achieve under the CEO’s leadership. This clarity will also help bring transparency and simplicity to the thorny issue of executive compensation. Moreover, it is an indispensable quality of a healthy compensation system.
The third factor is the quality of the support that the board offers the CEO. A strong board recognizes that the CEO is responsible for the firm’s management. The board should focus solely on governance and avoid any interference in managerial issues that are within the scope of the senior management team. Moreover, the board should always give the CEO its full support when he or she implements board decisions or acts upon board mandates. As an important player on the team, the CEO should be able to rely on the support of the board, if they are working in alignment with the board’s goals.
The fourth factor is the board’s commitment to supporting the development of the CEO, as well as the senior management team, in close collaboration with the CEO. This requires the board to have a deep understanding of senior managers’ qualities and performance, supported through comprehensive assessments and specific feedback, in collaboration with the CEO. Board committees responsible for appointments and talent development have a serious responsibility not only to ensure that the company has the right people with the right competencies, but also to nurture a dynamic organization where people have challenges, grow and that the leadership pipeline is both deep and robust.
The board’s approach to developing the CEO and senior managers is essential for the company. Board members need to recognize that there are certain dimensions for which quantitative metrics are not useful. Judgement is a critical element in board decision-making, especially when assessing people’s performance and potential. Prudent decision-making requires that board directors maintain a serious commitment to understanding data, but, more importantly, human dynamics. Effective board-CEO collaboration is critical for good governance, and directors should dedicate time to reflect on how to improve it.
NEWS&TRENDS.
A reflection on how directors are managing the increasing complexity of their oversight role and the importance of collaboration within the board can be found in a recent article by McKinsey, based on their latest survey on corporate boards. Read more here.
A new article by PwC offers some useful ideas on the importance of regularly assessing the board members' skills and knowledge to build an effective board and develop a solid succession plan. Read more here.
Some lessons to encourage and build a productive board culture can be found in a recent article by Russell Reynolds. Read here.
A new report by The Conference Board provides detailed data on current CEO succession practices in the Russell 3000 and S&P 500, along with insights on leadership transitions. Read more here.
A new analysis of annual risk factor disclosures by S&P 500 companies reveals an increase in the number of entities across different sectors identifying multiple risks related to artificial intelligence. Read more here.
IESE's recent research.
Friedman, H. and Ormazabal, G. (2024). “The role of information in building a more sustainable economy: A supply and demand perspective”. Journal of Accounting Research (forthcoming)
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